Copyright 2017 NPG of Idaho. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

POCATELLO, Idaho (KIFI/KIDK) - It's a decision that could cost the city of Pocatello millions of dollars.

The Idaho Supreme Court vacated, or made legally void, a Bannock County district court's ruling on the city's former PILOT program, which stands for payment in lieu of tax.

The Supreme Court's decision came with a 17-page explanation and reasoning behind the ruling. It's an issue that goes back more than ten years.

In 2005, Pocatello started a PILOT program where city-owned water and sewer departments were charged a property tax, which was then passed on to its customers. The city also started a "rate of return" or "return on equity" policy. The city decided it should be able to operate its water and sewer systems at a profit, like private utility companies do. So the city added an additional charge to water and sewer bills. All profits from both the rate of return and PILOT systems went into the city's general fund. The extra water and sewer charges did not necessarily go back to water and sewer for operation and maintenance.

In December of 2006, then-mayor of Pocatello, Roger Chase, sent a letter to the Attorney Generals' office asking about the rate of return policy and explaining the city's reasons for implmenting it.

Part of the letter reads, "Charging a rate of return is commonly used by public utilities and private sector companies, and we feel it is a fairer way to generate revenue for the City. As I am sure you are well aware, relying on property taxes for revenue will not work in Pocatello due to the number of property tax exemptions given by the State."

Chase continued in the letter by saying the city didn't want to have to increase property taxes to help revenue so that's why they wanted to move to a fee-based system.

In February, a Deputy Attorney General responded to the letter, citing other cases of law and summarizing the rate of return was "therefore not appropriate."

In 2011, the Building Contractors Association of Southeast Idaho filed action against the city challenging the PILOT. The district court ruled it was an unlawful charge and it followed that up in 2013 by issuing a judgment discontinuing the use the PILOT program.

The city stopped receiving rate of return charges in 2012 and stopped receiving PILOT funds in 2014, according to records from the Supreme Court decision. Those records show from 2006 to 2011, the profit earned by the city of Pocatello from rate of return and PILOT systems totaled about $4 million for that time frame.

Once the city discontinued the PILOT component, customers monthly bills lowered by about ten percent.

In April 2014, Hill-Vu Mobile Home Park and Ed Quinn filed for a refund of the fees paid through PILOT. Bannock County district court ultimately dismissed the complaint. In its reasoning, the district court said the Plaintiffs' (Hill-Vu and Quinn) state law claims were barred under the Idaho Tort Claims Act and that there was no unconstitutional taking under the Constitution's 14th Amendment.

That decision was appealed by Hill-Vu and Quinn to the Idaho Supreme Court.

On Wed. Sept. 6, 2017, the Idaho Supreme Court ruled to vacate the district court's original decision. According to Justice Eismann's written opinion on the decision, the Supreme Court felt the district court had made some errors in determining the original verdict.

The Supreme Court cited several reasons for vacating, or legally voiding, the district court's original decision. In short, the Supreme Court said the claim to refund was not barred by Idaho code; the PILOT program for purposes of law was similar to a tax, which the city did not have authority to impose; such a fee could not be imposed solely for the purpose of generating revenue, which the Court felt PILOT did; money is property which is included under the Constitution and cannot be legally taken without just compensation. Those are some of the criteria that the Supreme Court felt the plaintiffs' met and were not accurately decided on in district court.

The conclusion from the Idaho Supreme Court was to vacate, or legally void, the district court's ruling. The case will now to back to district court for costs and settlement, which the Supreme Court said will be consistent with their opinion. Depending on what's decided in district court, the city of Pocatello could have to pay back the $4 million in profit.

Copyright 2017 NPG of Idaho. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.